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Investors brace for election uncertainty

By Mark Hamrick · Bankrate.com
Monday, May 9, 2016
Posted: 6 am ET
Mark Lyons/Getty Images

Mark Lyons/Getty Images

You might be tempted to make financial decisions based on the past. But if you were trying to chart the future of the stock market in an election year, how could you ignore the unprecedented aspects of the 2016 cycle? Convention, it seems, hasn't only been cast aside -- it has nearly been stomped to death.

Nevertheless, it looks like this will be an election pitting Hillary Clinton against Donald Trump. As for how the election turns out, the odds mostly favor Clinton. But much of this cycle has been difficult to predict.

"Markets don't like uncertainty, and a Trump win would seem to inject a massive dose of it into the marketplace."

Veteran stock market watcher Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors, sees a greater likelihood of a Clinton win, something that's considered generally market-friendly.

"My guess is that investors will prefer little change in federal government policy and will be legitimately concerned about the economic impact of the foreign policy, immigration and trade policies that we guess will be included in the Republican/Trump position," Johnson says.

Stocks making a comeback

As for the stock market, the Standard & Poor's 500 index has risen considerably from its February low. However, the economy is a mixed bag of moderate jobs creation countered by slow growth in the first 3 months of the year.

Sam Stovall, U.S. equity strategist for S&P Capital IQ, notes that stock market results are typically positive in election years. He found that since 1948, the S&P 500 averaged a 6.1% gain during the 4th year of the presidential cycle. Stovall's research found that the index was up 76% of that time.

Where stocks are vulnerable

A couple of possible scenarios could cause the stock market's wheels to come off: For example, the job market suddenly tanks, or signs of a financial crisis emerge. It hurts that prospects for resolving long-term challenges, like unfunded entitlement spending or the need for tax reform, appear no closer to resolution. Still, for many years, gridlock in Washington has ironically been regarded as a positive for stocks.

So if Trump's candidacy discourages Republicans from going to the polls, it raises the chances of a Clinton victory and the possibility that either the Senate or both houses of Congress end up under Democrat control. Suddenly no more gridlock.

Markets don't like uncertainty, and a Trump win would seem to inject a massive dose of it into the marketplace. It's hard to see how stocks react well in that environment. "Our sense is that stocks are not yet reflecting the considerable uncertainty surrounding the presidential election," says Michael Farr, president & CEO of Farr, Miller & Washington, a Washington, D.C.-based investment firm.

Congress unlikely to act

There seems to be no sense of shared urgency or purpose among many elected officials.

"The longer-term U.S. fiscal position is dire, but over the next decade or so, the debt-to-GDP level is expected to be stable, which is both a curse and a blessing. It provides policymakers with ample time to address the longer-term problems (too little revenue and/or too much spending), but it's a curse because history suggests that Congress is unlikely to act until a crisis is at hand," says John Canally, chief economic strategist of LPL Financial.

Opportunities for investors

Don't change your investing approach simply because it's an election year. Certainly some measure of caution is always advised, but there may be risks and opportunities. For example, would defense stocks do better under one of the candidates?

Beyond the uncertainties related to the election cycle, challenges associated with the Federal Reserve's desire to "normalize" interest rates and weak global growth are only a couple of the variables that investors might take into consideration. Farr recommends investors stay in the market but remain nimble. "There is no reason to swing for the fences following one of the strongest bull markets in history," Farr says.

Canally acknowledges that uncertainty is a constant in one form or another. "Markets almost always climb the proverbial wall of worry. … The U.S. election uncertainty and the Brexit vote are the latest examples. Ultimately, however, equity prices are determined by actual corporate earnings growth and prospects for future growth, and this time is no different. Long-term investors will always focus on the earnings fundamentals."

Follow me on Twitter: @Hamrickisms.

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11 Comments
Susan
May 09, 2016 at 9:31 pm

Disgusting that Bankrate is trying to influence the election. Electing Hillary is absolutely unthinkable. Thinly disguised propaganda.

carecanada
May 09, 2016 at 8:35 pm

Maybe consider immigration to Canada if possible. it isn't perfect but perhaps a kinder, gentler, (less violent) and progressive in many ways.

Shawn D
May 09, 2016 at 7:15 pm

I guess C. Tenaglia is one of those Trump loving schmucks! Much like J. Gideon, Hilary hasn't been found guilty of anything; don't you find it odd and convenient that all of it is coming up right before an election? Hilary was only doing her job and listening to her boss, the horrible B.O. who has actually accepted full responsibility for Benghazi, simply Google: “Obama says he is 'ultimately' responsible for Benghazi security
“. As for the “home servers”, nothing breached/hacked.... Let’s wake up people... Trump has gone bankrupt more than any other business in the US history for the past 30 years and that's what some people want running our country? There should be an I.Q. test for having the privilege of voting... This country is going downhill because of ignorant, uneducated voters blindly voting without doing their research and educating themselves. Most people simply are pushed into their opinion by the news media that have stakes in political parties so if you watch fox you're going to be pushed one way...etc... Educate yourselves America... We are slowly being taken over by stupidity because of laziness!

Kitty
May 09, 2016 at 6:12 pm

Hillary is head and shoulders over any of the former candidates that were outgunned by an idiot like Trump. My suggestion is that you say your prayers and ask the good Lord to let Hilary win. God knows she is a smart lady with a background that prepares her for the Presidency. What kind of a President materialis the alternative? A nut who knows nothing about most of the situations he would walk into on Inauguration Day. I would be terrified to have him as President. If you don't want Hillary, get your Republican friends to find a good candidate. Someone who has an idea of what a President does.

Your calling her a criminal does not hurt her. We will consider the source. She used bad judgement by getting her info via a method that was not safe. Altho it was info that was not "secret". Thank God there is a candidate that is able to go into the White House and be able to pick up where President Obama left off.

Claire Tenaglia
May 09, 2016 at 4:49 pm

Please do not try to tell me who to vote for! Take my email address off Bankrate immediately!

Mark
May 09, 2016 at 4:25 pm

Joe,"Consider what the Electorate chose to put into the highest office in the Free World not once, but twice". Yes, our country really made the wrong move in electing W(orse ever) twice. We will still paying for that for many years to come - endless war and a free-falling economy, now there's a great president/party. "Pray that the "right mined" get off their posteriors and do something to put this country back into the black come November". Hadn't you heard that President Obama is not running this time?

Barry
May 09, 2016 at 4:09 pm

Some people are just out of their 'mined'.

Joe Gideon
May 09, 2016 at 3:41 pm

Mike,
"It is a stretch to think that anyone in their right mind would elect a criminal (Hillary). "
Consider what the Electorate chose to put into the highest office in the Free World not once, but twice. Pray that the "right mined" get off their posteriors and do something to put this country back into the black come November.

Mark
May 09, 2016 at 3:36 pm

We all should be glad that Mike is NOT our financial advisor. It is obvious that he doesn't have a clue to a prosperous stock market.

Mike
May 09, 2016 at 3:29 pm

Opinions... Everybody has them. It is a stretch to think that anyone in their right mind would elect a criminal (Hillary). Stop waiving that flag. I think many people will take uncertainty over additional democratic control.

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